DBRS Confirms Ontario Teachers’ Pension Plan Board at AAA, CFFT at AAA and OTFT at AAA and R-1 (high), Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating of the Ontario Teachers’ Pension Plan Board (OTPP or the Plan) at AAA. DBRS also confirmed Cadillac Fairview Finance Trust’s (CFFT) Debentures rating at AAA as well as Ontario Teachers’ Finance Trust’s (OTFT) Long-Term Notes, Canadian Short-Term Promissory Notes and U.S. Commercial Paper (CP) Notes ratings at AAA, R-1 (high) and R-1 (high), respectively. All trends remain Stable. The ratings are supported by the strong legislative and governance frameworks that create a highly captive asset base, require Plan sponsors to be responsive to deteriorations in funding status and impose high standards of care and prudence on OTPP’s board and management. The ratings are further supported by the Plan’s fully funded status on a going-concern basis for six consecutive years, substantial net assets and liquidity, strong investment returns and low-recourse debt burden.

OTPP achieved a net return of 2.5% in 2018, outperforming its benchmark by 180 basis points, largely driven by the performance of private assets and the appreciation of the U.S. dollar. Private equities saw strong results of 19.5%, generating 109% of the total net investment income achieved during the year. As a result of the positive investment results, net assets rose by $1.6 billion to $191.1 billion. In 2018, the Plan’s deficit on a financial-statement basis decreased to $1.2 billion. On a going-concern basis, the Ontario Teacher’s Pension Plan has been fully funded for six consecutive years and had a preliminary surplus of $10.0 billion as of January 1, 2019. The recent funding surpluses have enabled Plan sponsors to fully restore benefits and lower contribution rates. With the decision to file the funding valuation in 2017, Plan sponsors fully restored inflation protection for post-2009 pension credits and also ended the 1.1% special contribution rate for the Plan’s active members, which was scheduled to finish in 2026, reducing the contribution rate to 11% on average. With the decision to file the funding valuation in 2018, Plan sponsors allocated the $10.3 billion surplus to a contingency reserve. The January 1, 2019, valuation is not required to be filed with the regulatory authority; however, if the Plan sponsors choose to do so, they can decide how to allocate the $10 billion surplus before September 30, 2019.

Debt with recourse to OTPP rose in 2018 to $14.5 billion or 7.1% of adjusted net assets. During 2018, OTFT issued USD 2.0 billion, three-year senior unsecured notes with a 2.75% coupon while CFFT fully repaid the maturing Series C Debentures. Recourse debt remains low compared with total net assets, providing considerable room for cyclical fluctuations in asset values. DBRS notes that OTPP meets the DBRS criteria for CP liquidity support as outlined in the appendix to the “Rating Canadian Public Pension Funds & Related Exclusive Asset Managers” methodology entitled “Self-Liquidity for Canadian Public Pension Funds and Related Exclusive Asset Managers’ Commercial Paper Programs.” OTPP’s liquidity position remains sound with sufficient same-day available funds equal to at least five business days of upcoming liabilities and discounted assets equal to the remaining maximum authorized CP program limit, which is consistent with DBRS’s policy on backup liquidity support for pension plans and provides considerable short-term financial flexibility.

In 2018, OTPP continued to implement the OneTeachers’ investment strategy, focusing on total fund returns, value-added returns and volatility management.

OTPP’s primary challenge continues to be the Plan’s demographics. The ratio of active-to-retired members has continued to track lower, reaching 1.3 times (x) in 2018, and is expected to fall to about 1.2x in 2020 before eventually stabilizing at around 1.0x. The aging demographics result in growing net pension payments and reduced ability to equitably offset significant investment losses through contribution increases. To help mitigate the risk of its declining active-to-retired ratio, OTPP introduced conditional inflation protection in the Plan in 2010, which allows inflation protection to vary based on the financial health of the Plan. Conditional inflation protection, if fully invoked, is currently capable of absorbing an asset loss of $37 billion as estimated by OTPP.

DBRS expects the ratings to remain stable, but a negative rating action could occur if the Plan’s funding status deteriorates significantly.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers and Structured Finance Flow-Through Ratings, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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